Bitcoin and Digital Currency Impacts on Core ERP & Business Systems

Marty Zigman, Founder, Prolecto Resources, Marty Zigman is the Founder and President for Prolecto Resources, Inc. He has over 25 years of background bringing information technology busine... More >>

A safer, more efficient and faster payment system contributes to public confidence and economic growth," says Federal Reserve Board Governor Jerome H. Powell on January 26, 2015 in a paper "Strategies for Improving the U.S. Payment System". Indeed, in an age where we can send an email message instantly to anyone in the world, being able to securely send value (i.e., money or currency) at the speed of the internet will contribute to larger public confidence and economic growth policy goals. Bitcoin and digital currency is an emerging phenomenon that may have significant impact on global commerce. The new capacity to instantly move value to and from customers, partners, and employees outside of established providers (e.g., banks and credit card companies) suggests opportunities for those organizations seeking to lower transaction cost, extend reach, and minimize fraud. Collectively, the larger policy goals will be realized as digital currency adoption widens. In this article, the focus is not about how Bitcoin and related digital currencies perform their work as it is well covered elsewhere. Instead, the focus here is about usage considerations in day-to-day business operations. How an organization seeks to work with digital currencies will drive different system requirements. Starting with the objective of simple acceptance for payment, coupled with assistance from now established payment providers, the implementation effort will look familiar. However, as usage and adoption increase, we can anticipate greater system demands.

Bitcoin as a Payment Method

Most forward looking organizations are evaluating the potential of accepting Bitcoin and other digital currencies. The primary concern business managers speak about is valuation risk: meaning, if we accept Bitcoin, will it hold its value? Fortunately, there are now established Bitcoin merchant payment processors, such as BitPay, Coinbase, BitNet, GoCoin, and others, who enable a business to accept Bitcoin but receive dollars or another local currency. These providers have effectively addressed the valuation risk concern. They simplify what an organization must address because no Bitcoin is actually being held by the business. For example, the company can charge $100 to the customer and, depending on the payment processor fees, receive exactly $100 usually within one day. Under this model, it is called a "Payment Method" because the business can think about digital currency as yet another payment type such as "Cash" or "Credit Card". Because each of these providers offer a payment processor backend, the most analogous model is how you would treat PayPal in your business system. Hence, the mechanics and systems are very similar:

2. Approve Business Processing: Confirm it is safe to ship goods or deliver services.

Instead of a credit card's two step "Authorize" and "Capture" event processing model, Bitcoin's instant transfer mechanism looks closer to receiving cash or a bank wire. Depending on the timing of the transfer, accounting considerations may suggest recognizing a liability up front before shipping the goods, or satisfying the payment of an existing receivable. These questions drive the financial system concerns and the level of automation required.

Bitcoin as a Foreign Currency

As adoption of digital currency increases, we can anticipate the next wave of requirements beyond the simple Payment Method model. In this more complex foreign currency model, organizations will hold digital currency balances because they see value in circulation. At this point, a company’s business system (ERP; examples include SAP, NetSuite, Microsoft Dynamics, etc.) becomes increasingly important due to the accounting requirements. Several key features are needed to properly manage foreign currency transactions:

1. Prices: A feed of exchange prices between local currency (dollars) and the digital currency (Bitcoin). Choosing a price feed and establishing the exchange rate demand conversation between the Accounting department and perhaps outside auditors to establish "the price."

2. Currency Data Types: Most currency uses only two decimal places; Bitcoin uses eight. To solve this, shift the decimal place to the right by six digits to "teach" traditional accounting systems how to recognize the new currency.

3. Foreign Currency Definitions: Often, this is where the ERP system will have the most problems. The ability to "constitute a currency" can be a distinguishing feature to solve this requirement. Some ERP systems are limited to a few popular currencies (e.g, USD, CAN, and EUR). Others only support ISO 4217 Currency Codes. Where possible, substitute a traditional currency that will not be used in the business for the digital currency.

In addition to the three considerations above, because digital currencies can be used to transfer value to suppliers and partners, treasury controls become a concern. The good news is that a range of different "wallet" options are available that produce rule-based signature requirements.

Regulatory Considerations

The digital currency industry is only now emerging. Traditionally, in the United States, the movement of money has fallen under both federal and state regulatory regimes. Historically, nation states have backed currencies including their regulation and usage. Global digital currencies not created by governments are still being understood. At this time, guidelines and laws for digital currency are being formed which are shaping consumer usage and business practices. Payment processors will have the most work to do to ensure adherence to "know your customer," "antimoney laundering", and other license requirements.

For a mainstream business contemplating using digital currency, the business systems and associated practices likely already collect customer information as needed to simply conduct business -- hence there may be little to no additional burden. While it is possible to transact with Bitcoin without a third party payment processor, it makes more sense to minimize operational, technical and regulatory risk by working with an established payment provider. Ultimately, CIOs and information system professionals ought to seek legal advice on how they plan to use Bitcoin to ensure system requirements meet guidance.

Finally, if a business holds and transacts with a digital currency, they are subject to certain tax obligations. The good news is that treating Bitcoin as a foreign currency will properly "price" each transaction, allowing tax accountants to reconstitute the books offline; a common practice for tax accounting professionals.

A number of the Bitcoin payment processors offer ready-to-go integrations with popular ecommerce applications. Some, such as NetSuite, have extensive integrations with ERP systems, meeting both the Payment Method and Foreign Currency requirements outlined above. All the payment processors offer a proprietary API to allow you to design your own logic and data integration. The good news is that the options and choices are growing, while the effort needed to come up to speed are falling. Due to the extensive capital invested in the emerging digital currency industry, the CIO has many more options to "Buy" vs. "Build".

Conclusion

Bitcoin and the digital currency phenomenon continue to grow; the full impact is only beginning to be understood by the business community. CIOs have the opportunity to bring leadership to their organizations by producing projects that can capture digital currency promises of near instant payment, extended customer and partner reach, lowered cost, all while improving privacy and minimizing fraud. The guidelines in this article will help the information systems professional understand digital currency in relationship to their existing business systems enabling them to produce leadership to generate enhanced enterprise value.